Its Implications Its Giant Carillion and TheCollapse of P3 By John Loxley

Canadian Centre for Policy Alternatives - Manitoba office The Collapse of P3 Giant Carillion and Its Acknowledgements Implications The helpful comments of Jim Silver, Lynne Fernandez isbn 978-1-77125-384-0 and Jesse Hajer are acknowledged. January 2018 We wish to acknowledge the generous financial support of the Social Sciences and Humanities Research Council of Canada through the Manitoba Research Alliance.

About the Author John Loxley is Professor of Economics in the Department of Economics at the University of Unit 205 – 765 Main St., Winnipeg, MB R2W 3N5 Manitoba. tel 204-927-3200 fax 204-927-3201 email [email protected] The Collapse of Carillion in the UK, Causes and Consequences

Carillion, a major global player in the promo- Carillion collapsed after it had failed to meet tion of Public-Private Partnerships (P3s) has huge debt commitments in 2017. The debt was gone into liquidation in the UK. The collapse of the result of over-expansion of P3s by Carillion, this massive company is a case study of all that delays in implementing some of its large P3s with is wrong with P3s as an approach to building big up-front costs, and a slowing down of new P3 and operating public infrastructure. Carillion deals in the UK as government evaluates the P3 sponsored and financed over 60 P3s but more strategy and grapples with . This combi- importantly provided the facility management nation of factors caused cash flow problems for services for them once was com- Carillion which, in the past, had probably been pleted. It was the second largest builder in the hidden by the continued expansion of P3 busi- UK. It also held many government ness. It also dramatically reduced profits. In July contracts and undertook project financing as 2017 Carillion wrote down £845 million (around well as construction. Ca$1.4 billion) of debt, £375 million on account In the UK, Carillion was responsible for school of UK P3 business and £470 million on account dinners and cleaning services to 230 schools, and of P3s in the Middle East and Canada. Its share delivered maintenance and facility management price dropped dramatically but even then, so services to many hospitals, covering the needs of wedded was the Tory government to support- 200 operating theatres and 12,000 beds and cater- ing private business in the provision of public ing for 19,000 meals a day. It maintained 50,000 infrastructure and services, that it was awarded homes on Army bases; had £200m of prison con- further contracts by government amounting to tracts and other major construction projects, £1.3 billion to the end of 2017. But the cash flow including work on highways and high speed rail and profit problems continued to mount so that projects. It had annual sales of £5.2 billion (about by January 2018 Carillion’s share price had fallen Ca$9.4 billion), employed 19,600 workers in the to only 7% of its May 2017 level and the company UK, 6,000 in Canada and 46,000 worldwide. It was liquidated. is now being wound up by the Official Receiver, What this means is that the UK government assisted by the consulting/accounting firm PWC. has had to step in to ensure that school children

The Collapse of P3 Giant Carillion and Its Implications 1 are fed (local fire brigades are helping out here!), them, that they are unable to be objective. There that patients receive food and laundry facili- seems to be, however, no mechanism for hold- ties, that prisons are staffed and that roads are ing them accountable for their failings. There are maintained. This puts the lie to the principal ad- echoes here of the delinquency of bond rating vantage claimed for P3s which is that they are agencies and banks in the 2008 financial crisis. supposed to transfer risk from the public to the Who will pay for the collapse? Carillion private sector. shareholders will receive nothing; their shares are worthless! The large banks which advanced (T)he fundamental issue raised by Carillion’s the unsecured debt, , Lloyds, HSBC, failure is that vital public services cannot be RBC and Santander, will also lose, though PWC outsourced to private contractors, without lists ‘securing the best outcome for creditors’ Government underwriting the risks of alongside ensuring ‘the continuity of public collapse…So-called risk transfer, where services’ as the priority of the Official Receiver financial risk associated with infrastructure (PWC, 2018). PWC is also asking all employees, construction and operation was transferred to agents and subcontractors to continue to work the private sector, to justify the higher interest as normal and they will be paid for the work on PFI (PPP) loans (double the interest rate on they do during the liquidations. At the same Government loans) is, and always was, a massive time, however, they are also calling for expres- con (Benjamin, 2018). sions of interest from companies which might But it was this so-called risk transfer that jus- be interested in buying portions of Carillion’s tified the value for money that P3 proponents business (PWC, 2018), which must be quite un- claimed for them which was used to justify their settling to workers. implementation. And this was in spite of the There are concerns that many workers will refutation of risk transfer by academics in Eu- lose their jobs as contracts are restructured to rope (such as Pollock et al, 2004 and Whitfield, replace Carillion and assets sold off to liqui- 2006, 2010) and in Canada (Loxley and Loxley, date debts. Work has ceased on some construc- 2010 and Hamel, 2007) going back many years. tion sites and workers sent home. Furthermore, Unions on both sides of the Atlantic also chal- some 30,000 small businesses are owed money lenged this assertion, but to no avail. by Carillion and are unlikely to be paid, which The collapse of Carillion also raises issues of will inevitably lead them to lay off workers. The the oversight of P3 companies by auditors. Only collapse will cost , a relatively ten months before liquidation, its auditor, KPMG, large company, between £35 and £45 million, had given its seal of approval to Carillion’s finan- with unknown implications for their workers. cial statement. Yet Carillion announced the de- Meanwhile, the executives of Carillion relaxed terioration of its finances in early December 2016 the provisions on the claw back of their bonuses which was followed by huge and unsustainable in 2016 and are said to have paid themselves £4 increases in its debt. How could KPMG not have million in 2017, though under public protest, the realized this? This is yet another example of the appears to have recalled bo- terrible worldwide record of KPMG, a major advi- nuses and severance payments (, sor to Manitoba’s government (Silver 2017). The January 18, 2018). reality is that the large auditing and consulting Carillion has a pension deficit of around £800 companies are so bound up in all aspects P3s, million putting the pensions of around 27,500 from assessment of proposals and measurement workers at risk. Fortunately, in the UK there is of value for money, to evaluating and auditing the State Pension Protection Fund which com-

2 canadian centre for policy alternatives —­ MANITOBA pensates defined benefit schemes when the -em serious questions to be asked, therefore, about ployer is insolvent. This will take over the plans how the pension gap was allowed to grow to be but even then, workers will lose 10-20% of what so large, especially given the auditor’s clean bill they would have expected to receive. There are of health.

The Collapse of P3 Giant Carillion and Its Implications 3 Carillion in Canada

Carillion obtained about 11% of its total annual engaged in electrical transmission and related revenue or £596 million (over Ca$1 billion) from fields across Canada. Canadian operations (Annual Report, 2016) and Carillion does have a Manitoba connection. employs 6,000 Canadian workers. It is heavily In 2014 it purchased Rokstad, a BC company involved in 10 P3s in Canada with total capital specializing in power line construction and assets of $3.25 billion, eight in and one maintenance. In December 2016 Rokstad was each in Saskatchewan and the Northwest Ter- awarded a $200 million contract by Manitoba ritories. Seven of these are hospitals and two are Hydro to deliver part of its Bipole lll high-volt- mental health centres. It was a failed attempt age transmission line. Work began in late 2016 to withdraw from the health sector in 2017 that and is scheduled for completion in 2018. This helped precipitate the UK crisis. Carillion had involves clearing rights of way, building towers hoped to raise $300 million by selling off some and stringing cables. Rokstad’s performance has of its health assets, a move deemed by the CEO as been less than satisfactory, constituting a huge being crucial to its global restructuring (Waldie, risk to timely completion of the Bipole project 2018), though we do not know precisely which but not because of anything to do directly with ones had been targeted. the failure of its parent company. The work has Carillion played and still plays many roles been delayed, over budget and unsatisfactory, in each of the P3s, from developer, equity in- forcing Manitoba Hydro to descope its work and vestor, financier, design-builder, facilities man- shift part of the contract to another contractor ager and re-newer of lifecycle assets. On the (Public Utilities Board, 2018). Manitoba Hydro facilities management and maintenance side, continues to work with Rokstad but monitors it it is committed in all but one of the P3s to at closely to reduce further risk (Public Utilities least 20 years of involvement and for most, 30 Board, 2018, p.43) years or more. So how will the liquidation of the parent Carillion is heavily involved in out-sourced company affect Carillion Canada? The -an road maintenance in Ontario and Alberta, with swer is that we really don’t know. The Canadian contracts covering 42,000 km of road and is also office is assuring workers, suppliers and the -or

4 canadian centre for policy alternatives —­ MANITOBA Table 1 Carillion Canadian PPP Projects Portfolio Project Sector Capital Delivery Carillion’s Financial Substantial Location Cost Model Role Close Completion/ ($CAD) Years of Concession Stanton Territorial Health $300m Design- Developer, Equity 2015 2018/ Yellowknife, Hospital Renewal Build- Investor, Financier, 30 Years NWT Finance- Facilities Management, Maintain Lifecycle Renewal Saskatchewan Hospital Health $300m Design- Developer, Equity 2015 2018/ North North Battleford Build- Investor, Financier, 30 Years Battleford, Finance- Design-Builder, SK Maintain Facilities Management, Lifecycle Renewal Oakville Trafalgar Health $1.1b Design- Developer, Equity 2011 2015/ Oakville, Memorial Hospital Build- Investor, Financier, 34 Years ON Finance- Design-Builder, Maintain Facilities Management, Lifecycle Renewal Forensic Services and Justice, $300m Design- Developer, Equity 2010 2013 , Coroner’s Complex Secure Build- Investor, Financier, 30 Years ON Finance- Design-Builder, Maintain Facilities Management, Lifecycle Renewal Centre for Addiction Health $200m Design- Developer, Equity 2009 2012/ Toronto, and Mental Health Build- Investor, Financier, 30 Years ON Finance- Design-Builder, Maintain Facilities Management, Lifecycle Renewal Royal Victoria Regional Health $260m Build- Developer, Financier, 2009 2013/ Barrie, Health Centre Finance Design-Builder 25 Years ON Sault Area Hospital Health $276m Design- Developer, Equity 2007 2010/ Toronto, Build- Investor, Financier, 30 Years ON Finance- Design-Builder, Maintain Facilities Management, Lifecycle Renewal Sunnybrook Health Health $142m Build- Developer, Financier, 2007 2010/ Toronto, Sciences Centre Finance Design-Builder n.a. ON M-Wing Expansion Royal Ottawa Mental Health $130m Design- Developer, Equity 2004 2007/ Ottawa, Health Centre Build- Investor, Financier, 20 Years ON Finance- Design-Builder, Maintain Facilities Management, Lifecycle Renewal Brampton Civic Health $510m Design- Developer, Equity 2003 2007/ Brampton, Hospital Build- Investor, Financier, 25 years ON Finance- Design-Builder, Maintain Facilities Management, Lifecycle Renewal

Source: Carillion: http://www.carillion.ca/capabilities/public-private-partnerships-(ppp).aspx#.Wl_De3lMFdg ganizations it is contracting with that all is well “Our Canadian leadership is currently assess- and that its operations are “not in liquidation ing the situation and working with stakeholders and continue uninterrupted… Our employees, to ensure continuity of operations” suggesting subcontractors and suppliers in Canada con- that there is some doubt about the future of the tinue to be paid and we remain committed to Canadian operations. If, through the process of delivering safe, quality services for our clients” liquidation, the stability of the Canadian opera- (Waldie, 2018). It goes on, however, to state that tions is called into question, contingency plans

The Collapse of P3 Giant Carillion and Its Implications 5 will need to be ready to ensure that the ongoing fortunately, pension protection there is limited operations of the P3s in the health sector are se- to $1,000 per month and only to workers “who cured. Likewise, the road maintenance and pow- meet certain age and service criteria” (Ontario er activities will need to be provided for. In the Securities Commission, 2018). case of Manitoba Hydro, its submissions to the As unions representing health care workers PUB make it clear that it does have contingency have recently argued, what is needed is an end to plans in the event that Rokstad fails to deliver, privatizing health care delivery and the contract- for whatever reason. ing out of essential services. Workers affected Until the future of Carillion’s operations in must receive guarantees from government that Canada is clarified, workers will worry about their they will be paid and their pensions protected, jobs, incomes and pensions. On pensions, as the whatever happens to Carillion Canada. P3s have recently insolvency and liquidation of Sears has added huge costs to service delivery on the basis highlighted, Canada is way behind the UK in of bogus claims about risk transfer. The Carillion providing support to workers when companies collapse shows unambiguously that ultimately become insolvent. Only one province has a pen- government is on the line for risk. It is time to sion protection fund. Fortunately, that is Ontario cease using P3s and bring infrastructure build- where many Carillion workers are located. Un- ing and maintenance back into the public sector.

6 canadian centre for policy alternatives —­ MANITOBA References

Benjamin, 2018, Carillion Bankers and PFI Bail- Pollock, Allyson, David Price and Stewart Player, outs, The People VersusPFI . January 14. http:// 2004. Public Risk for Private Gain: The Public peoplevspfi.org.uk/2018/01/14/carillion-bank- Audit Implications of Risk Transfer and Pri- ers-and-pfi-bailouts/ vate Finance. Unifor. London Cox, Josie, 2018. Carillion collapse latest: Con- Public Utilities Board, Manitoba, 2018. Rebuttal struction giant won £1.3bn of contracts after Evidence of Manitoba Hydro. With Respect profit warning that kick-started demise. The to the Written Evidence Of: MGF Project Ser- Independent, January 15. http://www.inde- vices. January 16. http://www.pubmanitoba. pendent.co.uk/news/business/news/carillion- ca/v1/proceedings-decisions/appl-current/ collapse-latest-updates-contracts-win-profits- pubs/2017%20mh%20gra/mh%20exhibits/ warning-construction-hs2-nhs-a8160231.html mh-117%20-%20manitoba%20hydros%20re- Hamel, Pierre J., 2007, ‘Public-Private Partner- buttal%20for%20the%20mgf%20report.pdf ships (P3s) and Municipalities: Beyond Prin- PWC, 2018. Carillion. https://www.pwc.co.uk/ ciples, a Brief Overview of Practices’, Institut carillion national de la recherche scientifique, Montreal. Silver, Jim. 2017. “KPMG: Reasons to be Skeptical Loxley, John and Salim Loxley, 2010. Public Ser- of the Advice They Offer.” Canadian Centre for vice Private Profits: The Political Economy of Policy Alternatives-Manitoba, November 16. Public-Private Sector Partnerships, Fernwood Waldie, Paul, 2018. Carillion’s Canadian opera- Publishers. tions ‘continue uninterrupted’ amid British Ontario Securities Commission, 2018, How parent’s liquidation. The Globe and Mail, Jan- your DB pension is protected. https://www. uary 17. https://www.theglobeandmail.com/ getsmarteraboutmoney.ca/plan-manage/re- report-on-business/carillions-canadian-oper- tirement-planning/pension-savings-plans/ ations-continue-uninterrupted-amid-british- how-your-db-pension-is-protected/ parents-liquidation/article37619857/

The Collapse of P3 Giant Carillion and Its Implications 7 Watts, Joe, 2018. Carillion bosses face inquiry after Whitfield, Dexter, 2010, Global Auction of Public protecting ‘exorbitant’ £4m bonuses ahead of Assets: Public Sector Alternatives to the Infra- collapse; Inquiries launched as firm goes bust structure market and Public Private Partner- risking 20,000 jobs and an array of public ser- ships. Spokesman. Nottingham. vices. The Independent, January 16,. http://www. FCA launches investigation over Carillion mar- independent.co.uk/news/uk/politics/carillion- ket updates : Cat Rutter Pooley January 3, collapse-bonuses-investigation-inquiry-liquida- 2018 Financial Times https://www.ft.com/ tion-government-outsourcing-a8160946.html content/96d2855e-6b17-38d3-91f9-f20ce2c- Whitfield, Dexter, 2006,New Labour’s Attack a63df on Public Services, Spokesman. Nottingham.

8 canadian centre for policy alternatives —­ MANITOBA The Collapse of P3 Giant Carillion and Its Implications 9 Unit 205 – 765 Main St., Winnipeg, MB R2W 3N5 tel 204-927-3200 fax 204-927-3201 email [email protected] WEBSITE www.policyalternatives.ca